New York attorney general files civil charges against Bank of America

HAPPIER TIMES: Then-Merrill Lynch CEO John Thain, left, and Ken Lewis, CEO of Bank America at the time, shake hands after a news conference in New York as the financial powerhouses prepared to finalize a deal that would create enormous backlash.

NEW YORK — The New York Attorney General's Office said Thursday it filed civil charges against Bank of America and its former chief executive, Ken Lewis, saying the bank misled investors about Merrill Lynch before it acquired the Wall Street bank in early 2009.

Civil charges were also being filed against Joe Price, who was chief financial officer at the time of the deal and now heads B of A's consumer banking division.

At the same time Attorney General Andrew Cuomo's office was filing its civil charges, the Securities and Exchange Commission reached a settlement to resolve federal charges it brought against the bank over similar issues. It is the second time the SEC and Bank of America have tried to settle that case.

Bank of America has been accused of failing to properly disclose losses at Merrill and bonuses paid to investment bank employees before the deal closed. Cuomo called Bank of America's actions egregious and reprehensible in deceiving shareholders and the federal government.

The bank, Lewis and Price are facing charges under New York's Martin Act, a wide-ranging securities law that is aimed at fighting fraud.

Cuomo's use of the Martin Act could be problematic for Lewis and Price. Unlike federal securities law, the Martin Act doesn't require proving any intent to defraud shareholders, said John C. Coffee, a Columbia Law School professor specializing in corporate governance and securities law.

"You merely have to show that these individuals were responsible for materially false disclosures made to investors," Coffee said. "It's somewhat more threatening" than federal law.

Because it is a civil charge, there is no possibility of jail time.

Bank of America received an additional $20 billion in government bailout funds in January 2009 to help offset losses it absorbed as part of the Merrill Lynch acquisition. In December, Bank of America repaid the $20 billion, plus the initial $25 billion it received in government bailout money.

Lewis stepped down as CEO from Bank of America Corp. on Dec. 31 after almost a year of strife that followed the bank's purchase of Merrill Lynch. Price became head of the bank's consumer banking division, taking over for Brian Moynihan, who succeeded Lewis as CEO on Jan. 1.

Moynihan is not under investigation.

Cuomo's office claims Bank of America intentionally misled shareholders about the more than $15 billion in losses Merrill recorded in the fourth quarter of 2008 to get the deal completed. Bank of America also hid $3.6 billion in year-end bonuses Merrill employees received as it asked its shareholders to approve the deal, the suit alleges.

Bank of America then used the mounting losses to force the government to provide it with the additional $20 billion in bailout money, the lawsuit claims. Lewis has testified before Congress that he was forced by government regulators to complete the deal, even though he had trepidation about doing so.

Richard W. Painter, a law professor at the University of Minnesota and an expert on securities fraud, said the federal government's role in the merger makes the case particularly tricky.

If the Treasury or regulators were aware of any misrepresentation to Bank of America shareholders, then Cuomo will in effect be going after Lewis, Price and the bank "with the federal government as an accomplice," Painter said.

"The question is going to be: Where was the government when all this is going down and is anyone going to hold the government accountable if they did sign off on this?" he added.

"The evidence demonstrates that Bank of America and its executives, including Ken Lewis and Joe Price, at all times acted in good faith and consistent with their legal and fiduciary obligations," Bank of America spokesman Robert Stickler said. "In fact, the SEC had access to the same evidence as the NYAG and concluded that there was no basis to enter either a charge of fraud or to charge individuals."

Mary Jo White, Lewis' attorney, said in a statement that Cuomo's decision to sue was "a badly misguided decision without support in the facts or the law." Lawyers for Price said the attorney general's allegations were "flatly contrary to the evidence."

Bank of America did agree to pay $150 million to shareholders to settle the SEC charges. The agreement still must be approved by U.S. District Judge Jed S. Rakoff. In September, the bank and the government agreed to a $33 million settlement only to have Rakoff reject the agreement.

Stickler confirmed that the bank won't not be going to trial with the SEC on their charges, assuming the settlement is approved. The trial was scheduled for March 1.